Dark Pool
A private trading venue that allows large institutional investors to trade securities without revealing their orders to the public market until after execution.
What is Dark Pool?
A dark pool is a privately operated alternative trading system (ATS) that allows institutional investors — such as pension funds, mutual funds, and hedge funds — to buy and sell large blocks of securities without displaying their orders on public exchanges before the transaction occurs. Dark pools were created to allow large institutions to trade without signaling their intentions to the broader market, which could cause prices to move adversely before the trade is completed, a problem known as market impact. Trade reports are published after execution but not before. While dark pools reduce market impact for large orders, critics argue they fragment liquidity, reduce price transparency, and can disadvantage retail investors. The SEC regulates dark pools as alternative trading systems under Regulation ATS.
Example
A pension fund wants to sell 5 million shares of a mid-cap company worth approximately $150 million. If it placed this order on a public exchange, algorithms and market participants would detect the large sell order, driving the price down before the fund could complete its sale. By routing the trade through a dark pool, the fund negotiates the transaction at a single agreed price without tipping off the market — potentially saving tens of millions in price impact costs.
Source: SEC — Dark Pools